China Ousts Stock Regulator as Part of Blame Game

Investors look at screens showing stock market movements at a securities company in Beijing in January 2016.FRED DUFOUR AFP/Getty Images

China replaced its top securities regulator in a move to apportion blame for the government’s bungled policies during and after the country’s stock market crash this summer.

The news that Xiao Gang is out as head of the China Securities Regulatory Commission was announced in the state press over the weekend. Xiao may be best known for China’s infamous stock circuit breakers, an idea he championed and which lasted only four (down) trading days in the beginning of January before being abandoned. Xiao was also part of the Communist Party’s effort more than a year ago to cheer-lead for the stock market as a show of confidence in the country’s economy.

The real cause of the summer’s stock market crash, when shares fell 30% over two months, was leverage, which had sent stocks rising ever since the beginning of the year as traders used ever increasing levels of debt to boost their bets on stocks’ rise. When traders couldn’t buy anymore, and stocks turned downward, leverage magnified their losses. The Communist Party, convinced it could control a complex system like the stock market, ended up blaming short sellers, foreigners, and eventually its own.

Reports circulated last year of premier Li Keqiang banging on tables demanding answers from officials. Market declines were unacceptable. Xiao Gang was caught in the middle with little recourse. When he did react, with circuit breakers in January, he failed.

Xiao’s replacement is considered a conservative apparatchik. A former chairman of Agricultural Bank of China, one of the country’s big-four state-owned banks, Liu Shiyu isn’t noted for his knowledge of equities markets or any great reforms to China’s financial system, which is falling under greater control of President Xi Jinping’s conservative governance. Instead, it appears he will be continuing the Party’s feeble efforts to manufacture rising stock prices.

Reuters broke the news of Xiao’s dismissal back in mid-January, saying the Communist Party “is extremely unhappy with Xiao Gang” after his circuit breakers exacerbated equity swings and that Xiao “tendered his resignation as CSRC chairman last week.” The news was quickly denied by his office. “This information does not conform to the facts,” the securities regulator said on Weibo. More than a month later, on Saturday, Xinhua officially carried the news that Xiao was out.

The move is the first of many in a reshuffling of economic positions in China following general criticism and dissatisfaction of how recent events have been handled, the Wall Street Journal cited anonymous Chinese officials saying, one of whom said, “Right now, stability trumps financial innovation.”